Wednesday, July 8, 2009

Personal Service Corporations

One of the things that keep accountants up late at night is heavy taxation. That is why most accountants dread the deadly little pill that is Personal Service Corporations (PSC) and Qualified Personal Service Corporations (QPSC). Any corporation in which substantially all the activities of which involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial, performing arts, or consulting, and substantially all the stock, by value, is held directly or indirectly by employees, retired employees, the estate of any such employee or former employee is deemed to be a Qualified Personal Service Corporation .

For this purpose the test for ‘substantially all’ is defined as 95% or more of the time spent by employees of the corporation is devoted to these activities. This also includes auxiliary functions that may support the proper function of these services. Such functions include the supervision of employees, and support services that may be related to the proper function of the business as a whole. This same 95% test applies to the ownership of the business function.

The largest stigma of all is the fact that if you fit the QPSC test(s) you are taxed at the highest corporate tax rate of 35% on all earnings. Even the average C Corporation has a much more favorable tax rate than this form of entity.

If you are a new business preparing to incorporate, please keep these facts in mind as there are few benefits and many pitfalls associated with this type of entity. Also, if you think you own a personal service corporation and these issues have not been addressed, contact a qualified adviser or send me an e-mail at tonym@dalbergandassociates.com.